CHAPTER 7
The Competitive Analysis
OBJECTIVES
7-1
7-2
7-3
7-4
7-5
7-6
7-7
Explain competitive impact.
Discuss the role of competition in private enterprise.
Explain Porter’s Five-Forces Model of Competition.
Explain direct and indirect competition.
Determine the geographic distribution of potential customers.
Conduct a competitive analysis.
Discuss the importance of competitive intelligence to
entrepreneurial success.
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Chapter 7
Slide 1
The Impact of Competition
Competition, when used in a business
sense, means a rivalry between
companies that sell similar products or
services.
Competitive impact means the ability
to effectively compete with other
businesses.
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Chapter 7
Slide 2
Competition and
Private Enterprise
Competition is a very necessary part of
private enterprise.
If a private enterprise system is to serve
the people efficiently, there must be
competition among those who produce
the products and among those who sell
them.
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Chapter 7
Slide 3
Similar Products and Services
Competitors offer similar products or
services for sale.
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Multiple Buyers and Sellers
 If there is to be competition within an
economic system, there must be many
buyers and many sellers.
 When these conditions exist in a market, no
individual or business can exert undue
pressure.
 Multiple buyers and multiple sellers ensure
competition by offering choices.
 Choices, in turn, help keep prices at fair
levels.
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Chapter 7
Slide 5
Freedom to Enter
or Exit Business
Competition in private enterprise means
that a new business can start at any
time.
It also means that a company or an
individual can stop doing business at
any time.
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Chapter 7
Slide 6
The Guarantee
of Fair Competition
Competition is protected by
Federal Trade Commission (FTC)
Sherman Antitrust Act
Clayton Act
Robinson-Patman Act
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Chapter 7
Slide 7
Monopoly
 A monopoly is a business environment in which a
single company, by controlling a specific supply of
products or services, sets prices, prevents other
businesses from entering the market, and controls
the available supply of the product or service.
 Because these practices are anticompetitive, the
government does not approve of them.
 The only monopolies the government allows are
those in industries in which the product or service
offered necessitates one supplier. This is often the
case with local utilities.
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Chapter 7
Slide 8
Sherman Antitrust Act
Passed in 1890
Makes any business deal illegal that
unreasonably restricts trade or
commerce among states
Outlaws price fixing
Makes owners or directors of a violating
business guilty of a crime
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Chapter 7
Slide 9
Federal Trade Commission
The FTC is a regulatory agency that
was established to enforce and monitor
the laws that protect competition.
It ensures fair competition among
businesses, encourages free trade,
carefully reviews business mergers and
acquisitions to prevent monopolies from
forming, and regulates advertising so
that it is not deceptive.
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Chapter 7
Slide 10
Threat of Entry
by New Competitors
What are the barriers to entering the
new market?
What will be the reaction to your new
company by businesses already actively
operating there?
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Barriers to Entry
 Size
 Special technologies
 Training
 Patents
 Experience
 Brand loyalty
 Start-up expenses associated with buildings,
equipment, and supplies
 Access to product and/or equipment vendors
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Competitive Reaction
 How will firms already doing business in the
industry react to a new start-up? Will they
ignore the new entrant as an insignificant
competitor, or will they wage all-out war?
 Will the competitors put pressure on their
vendors not to sell to the new business?
 Will they create promotional campaigns
aimed at solidifying brand loyalty?
 Will they send secret shoppers into the new
business?
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Chapter 7
Slide 13
Pressure from
Substitute Products
Are substitute products readily available
in a sufficient quantity and at a price
that might cause your potential
customers to switch?
How do you plan to deal with substitute
products?
What about the danger from substitute
distribution channels?
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Chapter 7
Slide 14
Bargaining Power of Suppliers
 Are the suppliers in a position to withhold
supplies of needed products?
 Can they extort a higher price because
supply is either limited or closely controlled?
 What can interrupt the flow of raw materials,
inventory, and supplies?
 If the flow is interrupted, what are the
alternatives?
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Chapter 7
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Bargaining Power of Buyers
 Are there a few large buyers that control the
industry?
 If so, are they in a position to exert undue
price and/or quality pressure on the new
company?
 What should the entrepreneur look for in
relation to buyers?
 How do you plan for an industry in which
buyers have a great deal of bargaining
power?
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Chapter 7
Slide 16
Types of Competition
 Direct competition refers to businesses that
derive the majority of their profits from the
sale of products or services that are the same
as or similar to those sold by another
business.
 Indirect competition is competition from
businesses that derive only a small
percentage of their profits from the sale of
products or services that are the same as or
similar to those sold by another business.
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Chapter 7
Slide 17
Geographic Customer
Distribution
Where do your potential customers live?
How far will they travel to do business
with you?
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Chapter 7
Slide 18
Competitive Analysis
A competitive analysis is defined as
the identification and examination of the
characteristics of a specific competing
firm.
A business-specific competitive analysis
provides you with the information you
need to pinpoint strengths and
weaknesses, both yours and the
competition’s.
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Chapter 7
Slide 19
Analysis of Competitors
Who Have Failed
Not only should all the identified direct
and indirect competitors be analyzed,
so should any that have recently gone
out of business.
It is important to include them in your
analysis so that you can benefit from
their mistakes.
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Slide 20
Analysis of Direct
and Indirect Competition
Five factors should be analyzed:
Price
Location
Facility
Competition type
Rank
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Sources of Information
about Competitors
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Yellow Pages
Promotional brochures
Promotional advertisements
Competitors’ customers
Competitors’ vendors
Trade associations
Competitors’ web sites
Competitors’ employees
News stories about competitors
Shop the competition
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Chapter 7
Slide 22
Competitive Intelligence
 Competitive intelligence (CI) is a systematic
and ethical program for gathering, analyzing,
and managing external information that can
affect a company’s plans, decisions, and
operations.
 SCIP, the Society of Competitive Intelligence
Professionals, describes itself as an
organization that is “serving professionals
who are leveraging knowledge for competitive
advantage.”
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